2. You are wrong. The level of foreign reserves is only affected by the central bank deciding to increase or deplete its foreign reserves.
3. A widening trade deficit doesnt reduce foreign reserves. A trade deficit can be financed by the public borrowing from overseas, the govt. borrowing from overseas or the nation selling assets to foreigners. Since foreign reserves are an asset, it can be sold/depleted in the short run to finance the trade deficit. However if the central bank doesnt sell reserves, a trade deficit doenst mean a reducing foreign reserves.
4. You dont need foreign reserves to import. If the central bank has no foreign reserves, import (trade) doent stop. All that happens is that the exchange rate is determined purely by the market forces of supply and demand.
If export goes down, the currency will depreciate on its own (even with zero foreign reserves) because the demand for the rupee will go down and thus imports will become more expensive and hence will go down. The second route is that exports go down, people borrow from overseas so no effect on currency and imports stays same. (Is this a free lunch? Not really, because you forego future consumption to maintain current consumption)
p.s. Note to mods, cud we split where this thread into the economics section.
we have one more "day by day" trading analysis of pakistan. here, on 18th august, this explain how foreign reserve fell down last week. if you read this report 6-7 times, you may understand how trading directly affect rupees-$ value and cause depreciation of Rs when import is high and also decrease foreign reserve at the same time. here inflation also has also some role on trading and rupees value.
sigatoka i work 8 hours every day and have my personal life also. there is nothing like who is winnin and who is loosing. you dont have to reply my all the response. please take some time, go thru some more news then we may talk on other topics related to economics again. thanks
http://www.pakistanbanks.org/career_development/am/articles/rupee_weaker_on_heavy_dollar_buying.html
RUPEE WEAKER ON HEAVY DOLLAR BUYING
IN the inter-bank market, the rupee/dollar parity commenced the week on a mixed note on August 15, after observing a long weekend on account of Independent Day holiday.
On August 15, the rupee weakened slightly versus the dollar in the inter-bank market, shedding one paisa on the selling counter, while making small gains of two paisa on buying counter, to trade at Rs60.30 and Rs60.32. The rupee had closed last week at Rs60.32 and Rs60.33.
On August 16, the rupee did not show any change against the dollar and remained traded at its overnight levels. However, dollars buying by the different banks pushed the rupee down on August 17, as importers rushed for dollars to settle their bills, which have risen due to persistent increase in oil prices. But sufficient dollar supply managed to restrict the fall in rupee value to two paisa. The dollar was quoted at Rs60.32 and Rs60.34 versus the dollar.
On August 18, rupee overnight weakness over the dollar persisted as rising demand for US currency kept the local currency under pressure. In the inter-bank market, the rupee lost three paisa more to trade against the dollar at Rs60.35 and Rs60.37.
The higher demand for dollars also pulled the foreign exchange reserves down by $34 million to $12.745 billion last week. This week, the rupee in the inter-bank market lost four paisa versus the dollar.
In the open market, the rupee maintained its weekend levels in terms of dollar changing hands at Rs60.50 and Rs60.55, after it resumed trade on August 15. On the following day the rupee managed to make small advances versus the US currency on its balanced demand and supply position. It recovered three paisa over its overnight levels and traded at Rs60.47 and Rs60.52 on August 16.
On August 17, the rupee extended further gains versus the dollar recovering two paisa, changing hands at Rs60.43 and Rs60.48. The rupee managed to hold firm ground on August 18, gaining another four to trade at Rs60.38 and Rs60.43. During the week in review, the rupee in the open market recovered 12 paisa against the US currency.
Versus the European single common currency, the rupee continued its downward trend and shed 10 paisa, changing hands at Rs76.57 and Rs76.67 on the opening day of the week, against previous weekendââ¬â¢s Rs76.47 and Rs76.57. On August 16, the rupee lost another 20 paisa to trade at Rs76.78 and Rs76.88. The rupee lost 30 paisa more on August 17 and traded at Rs77.12 and Rs77.22 against the euro. This was the third consecutive fall in the rupee value since the resumption of trading activities after a long weekend. The rupee continued easing against the euro on August 18, when it lost 13 paisa more to trade at Rs77.25 and Rs77.35 against the euro. In the entire week the rupee shed 78 paisa against the European currency.
In the international financial market, the dollar pared losses and was little changed against the euro in thin trading on August 14 as
"traders" speculated that US inflation data this week could push the Federal Reserve into again lifting interest rates.
The dollar had earlier eased against the euro after data showed the 12-nation eurozone economy grew at its fastest rate in six years, reinforcing the view that the European Central Bank could raise rates again. The euro has gained 7.4 per cent against the dollar this year, while sterling has surged 9.7 per cent against the dollar.
The dollar gained against the yen, but thin summer trade was confined to narrow ranges, as investors looked ahead to US producer price index and US consumer price index data for July to be released later in the week. The euro was little changed at $1.2719 in New York trade, while the dollar was up 0.3 per cent at 116.67 yen. The pound was down 0.1 per cent at $1.8874. The euro was up around 0.3 per cent at 148.43 yen and touched a peak of 148.57 yen, according to Reuters data, just short of a record high hit last week.
Any signs of an acceleration of "inflation" could lead the Fed to raise interest rates again, after pausing in a two-year-long tightening campaign this month,"giving the currency a short-term boost". Last week, the dollar posted its biggest weekly gain in almost a month against a basket of major currencies after a surprisingly strong retail sales report on Friday led some traders to question the view that the economy is slowing. Some analysts said the euro may struggle to extend its gains, since speculators have already ramped up their bets in favour of the euro against the dollar.
Speculators in International Monetary Market currency futures raised their bets on both a stronger euro and sterling to record levels in the week to August 8. The Fed left interest rates on hold at 5.25 per cent last week after raising them 17 straight times, though it kept the door open for more credit tightening if price pressures persist. Fed fund futures show that the market is pricing in a 48 per cent chance that the Fed will raise rates by another quarter percentage point to 5.50 per cent at its next meeting in September.
On August 15, the dollar slid after a survey showed producer prices were softer than expected in July, reinforcing a view that the Federal Reserve may not need to raise interest rates further to combat inflation. The dollar slumped sharply after news the core US Producer Price Index fell 0.3 per cent in July, stripping out volatile food and energy prices, the first monthly decline since October and well below the rise expected by economists.
The euro was up 0.5 per cent in New York at $1.2783. The dollar was down 0.5 per cent at 116.06 yen. The euro was trading at 148.41 yen after touching another record high of 148.62 yen earlier in the session, according to EBS data.
The yen repeatedly plumbed new lows against the euro in past sessions amid signs Japanese economic growth may be slowing and the Bank of Japan is in no hurry to raise interest rates again after the first rise in six years last month.
Sterling gained 0.3 per cent against the dollar to trade at $1.8933. The dollar fell 0.4 per cent to trade at 1.2370 Swiss francs. Adding to the dollarââ¬â¢s woes, a separate survey from the New York Federal Reserve showed manufacturing activity in August slowed to its weakest since June 2005. The market showed little reaction to separate data, showing that the United States attracted a net $75.1 billion of capital inflows in June, more than enough to finance that monthââ¬â¢s trade deficit of $64.8 billion.
With other central banks including the European Central Bank expected to raise rates this year, an end to Fed tightening could make it more difficult for the United States to finance its deficit, hurting the dollar. Some market watchers said the dollarââ¬â¢s sell-off after the PPI data could be short-lived, given that consumer price data on Wednesday is expected to point to an uptick in inflation and increase expectations for an interest rate hike.
On August 16, the US dollar fell for a second straight day after a tame report on
US inflation reinforced expectations the Federal Reserve will not raise interest rates further. The greenback tumbled to its low for the day after government data showed the core consumer price index, excluding food and energy prices, rose 0.2 per cent in July, below the median forecast of a 0.3 per cent rise in a Reuters poll, and down from a rise of 0.3 per cent last month.
In New York, the euro was up 0.4 per cent against the dollar at $1.2838 from about $1.2790, the level where it was shortly prior to the inflation data. The euro rose as high as $1.2865 on electronic trading system EBS, in sight of a two-month high of $1.2913 reached last week. The dollar also dropped against the yen, trading down 0.2 per cent at 115.84 yen. The euro was trading at 148.75 yen after earlier touching a record peak of 148.89 yen, according to EBS data.
The yen has suffered from expectations that the Bank of Japan will leave interest rates at 0.25 per cent for some time after its first rate rise in six years last month. Sterling hit a 1-1/2 week low against the euro as the Bank of Englandââ¬â¢s minutes from its last rate-setting meeting suggested there was no rush to repeat this monthââ¬â¢s surprise rate rise.
The pound made late gains against the dollar, however, as the US currency faced broad pressure on tame US inflation and industrial output data against the dollar, sterling reversed losses made after the BoE minutes as the greenback fell broadly due to tame US July consumer price index data. It last stood up 0.4 per cent at $1.9016.
On August 17, the US dollar recovered some ground, reversing two days of declines, with stronger-than-expected economic data forcing some investors to buy the currency back after selling it short following tame inflation data earlier this week.
The euro was down 0.1 per cent on the day at $1.2827. It was well down from the $1.2870 where it changed hands before the release of the Philly Fed survey, though still within a cent of the two-month peak of $1.2913 reached last week. The dollar was up 0.1 per cent at 115.94 yen, and up 0.3 per cent against the Swiss franc at 1.2325 francs.
Sterling was down 0.6 per cent at $1.8841, under pressure after British retail sales unexpectedly fell in July, adding to losses from August 16, when minutes released of the Bank of Englandââ¬â¢s last rate-setting meeting suggested the bank was in no hurry to repeat this monthââ¬â¢s surprise rate hike to 4.75 per cent. It hit a two-week low against the euro after weak British retail sales increased speculation the Bank of Englandââ¬â¢s recent surprise rate rise may not be repeated anytime soon. Against the dollar, sterling was steady around $1.8955, after dipping to the dayââ¬â¢s low of $1.8934.
At the close of the week on August 18, the dollar recovered against major currencies, moving back towards day highs against the euro and the pound, after falls in the wake of weaker-than-expected US consumer confidence data proved short-lived. The euro dropped to $1.2813 in late European trading, compared with $1.2825 late a day earlier in New York. The dollar stood at 115.82 yen, from 115.92. The pound was particularly weak, falling to 15-day lows against both the dollar and the euro.
Sterling has been on the back foot for much of the week after weaker-than-expected British inflation and retail sales data, as well as slightly dovish Monetary Policy Committee minutes, dampened hopes that the Bank of England will raise interest rates in the autumn. The pound failed to make any headway after data yet again showed very strong levels of both mortgage lending and money supply in Britain, both factors which are likely to worry rate-setters at the BoE.
The euro hit a record high against the yen on expectations eurozone interest rates will rise faster than in Japan, while the dollar steadied after strong data helped the US currency to trim losses made earlier in the week. The euro inched up to 148.90 yen on electronic trading platform EBS, its highest level since the single currency was launched in 1999, on expectations that the European Central Bank will keep raising rates after bumping them up to 3 per cent this month.
Sterling hit a two-week low against the euro and the dollar as investors scaled back bets on higher UK interest rates.